Gupta Seeks Identity of Possible Tipper ‘X’ at Goldman, P&G

Rajat Gupta, former Goldman Sachs Inc. director and former senior partner at McKinsey & Co., left, at federal court with his attorney Gary Naftalis in New York on Jan. 5, 2012. Photographer: Louis Lanzano/Bloomberg

Jan. 28 (Bloomberg) -- Lawyers for Rajat Gupta, the former
Goldman Sachs Group Inc. and Procter & Gamble Co. director who
has denied U.S. charges he leaked stock tips to Raj Rajaratnam,
are investigating whether the hedge fund manager had a different
inside source at the companies.

At a Manhattan court conference Jan. 20, defense attorney
Gary Naftalis complained federal prosecutors hadn’t turned over
documents he wanted on whether Rajaratnam or others at his hedge
fund, Galleon Group LLC, had a source inside Goldman Sachs or
P&G other than Gupta, a transcript of the proceeding stated.
Gupta is accused of leaking information about both companies.

At the hearing, Naftalis said Gupta’s defense may turn on
whether “there are people at Goldman Sachs and at Procter &
Gamble who are giving out inside information, whether it be
about Goldman or Procter & Gamble or affiliates.” That would
“constitute real exculpatory information for a real defense
that the source of any information here is not us but somebody
else.”

Assistant U.S. Attorney Reed Brodsky told the judge that
prosecutors had “no information, zero, no witness statements,
no documents, no type of any kind that anyone other than Mr.
Gupta tipped Mr. Rajaratnam or anyone at Galleon about material
nonpublic information of Goldman or of Procter & Gamble,”
according to the transcript.

‘Mr. X’

At the same time, Brodsky said prosecutors had turned over
documents that the defense contends may point to a Rajaratnam
source at Goldman or P&G other than Gupta. The government said
the files don’t involve tips that relate to the crimes with
which Gupta is charged.

As U.S. District Judge Jed Rakoff pressed prosecutors to
identify the purported source, whom he called, “Mr. X,”
Brodsky replied, “We’re happy to identify the individual to
them.” The prosecutor added that the documents “would negate
rather than support the notion that Mr. X was tipping Mr.
Rajaratnam about material nonpublic information.”

Near the conclusion of the discussion, Rakoff told Naftalis
the government is “going to give you Mr. X, they’re going to
point you to at least areas where they think Mr. X’s possible
involvement in leaking information comes up in the stuff you
have.”

Naftalis didn’t return a call seeking comment on the
hearing. Paul Fox, a spokesman for P&G, and David Wells, a
spokesman for Goldman Sachs, declined to comment.

At a hearing yesterday, Brodsky said the witnesses for
Gupta may include Goldman Sachs director Claes Dahlback and
Berkshire Hathaway Inc. reinsurance chief Ajit Jain.

Unclear Number

Last week, Naftalis said documents he received from
prosecutors were unclear on the number of possible sources
Rajaratnam had.

“It’s unclear whether it’s one source, two sources or 10
sources,” the defense lawyer said. The defense says the
government is required to turn them over to aid their case.

Gupta, who faces trial in April on five counts of
securities fraud and one count of conspiracy, faces as long as
20 years in prison if convicted on each of the securities fraud
charges and as long as five years if convicted of conspiracy,
according to the government. He also faces a fine of as much as
$5 million. Rajaratnam is serving an 11-year prison term after
being convicted of directing the biggest hedge fund insider
trading scheme in U.S. history.

Close Ties

The indictment cites three instances in which Gupta tipped
Rajaratnam, 54. The ex-Goldman Sachs director is accused of
telling the hedge fund manager about Berkshire Hathaway’s
$5 billion investment in the New York-based bank in September
2008, about Goldman Sachs’s unexpected fourth-quarter loss that
year, and about Cincinnati-based P&G’s poor performance in late
2008.

The indictment cites close ties between the two men, saying
Gupta, 63, of Westport, Connecticut, invested $2.4 million in at
least two Galleon offshore funds, put $10 million into a venture
with Rajaratnam called Voyager Capital Partners, and committed
$22.5 million to a fund they created to focus on emerging
markets in Asia.

Prosecutors said at the Jan. 20 conference that they may
file new charges by Jan. 31 that Gupta also tipped Rajaratnam
about P&G’s 2008 sale of Folgers Coffee Co. to J.M. Smucker Co.,
the transcript shows. Ellen Davis, a spokeswoman for Manhattan
U.S. Attorney Preet Bharara, didn’t immediately return a call
seeking comment on the possible charges.

‘Confidential’ Information

Gupta separately was caught on a July 29, 2008, wiretapped
conversation with Rajaratnam saying that Goldman Sachs’s board
was discussing asset purchases of commercial banks or insurers
such as Wachovia Corp. or American International Group Inc.
Goldman Sachs Chief Executive Officer Lloyd Blankfein testified
at Rajaratnam’s trial that the information discussed on the call
was “confidential.”

While the phone call didn’t lead to charges in the
indictment, the U.S. said it was an “overt act,” or an action
in furtherance of the crime.

Naftalis said at the Jan. 20 hearing that Goldman Sachs’s
interest in acquiring a commercial bank or insurer was already
“on the radar screen” before July 2008. Goldman Sachs Chief
Financial Officer David Viniar and others made presentations to
analysts at investment banks about a potential acquisition of a
commercial bank, Naftalis said.

“Senior Goldman people made formal presentations to
analysts in which they discussed with them the pros and cons of
whether or not, that they were considering buying a commercial
bank,” Naftalis said, according to the transcript.

‘Hot Stuff’

The government has turned over to Gupta’s legal team
3.2 million pages of evidence, Naftalis said. He asked Rakoff to
direct prosecutors to identify information that could be
helpful.

“If there are these materials, they should identify for us
what these materials are, not for us to run with a Geiger
counter through 3.2 million pages,” Naftalis said. “This is
critical stuff to get as soon as possible because this is the
stuff that we want to investigate on, that there are other
sources at Procter & Gamble and Goldman of inside information.
This is hot stuff for us.”

Yesterday, Rakoff asked prosecutors and defense lawyers to
name witnesses and summarize their accounts to resolve a dispute
over evidence that had erupted in the case.

Jain was interviewed by both prosecutors and defense
lawyers and may be a witness for Gupta, Brodsky said.

“Ajit Jain, a close friend of Gupta’s, spoke to us after
he spoke to the defense,” Brodsky said. “My understanding is
that he spoke to the defense again after he spoke to us.”

The prosecutor said Dahlback, who is a former chief
executive officer of Sweden’s Investor AB and sits on Goldman
Sachs’s board of directors, spoke to Gupta after Rajaratnam’s
October 2009 arrest.

Naftalis told the judge it was too early to say who he will
call as witnesses.

Berkshire CEO Warren Buffett picked Jain to run the
company’s reinsurance operations more than 20 years ago and has
repeatedly praised the executive for his performance and
character. Jain, 60, heads Berkshire’s National Indemnity Co.
and specializes in writing large and unusual policies.

Buffett Succession

Buffett, 81, is planning for succession at Berkshire and
has said Jain would have the support of the board if he wanted
to be the next CEO. Jain “loves what he does, he’s not looking
to take my job,” Buffett said last year.

Jain didn’t immediately respond to a message left with an
assistant yesterday. Michael DuVally, a spokesman for Goldman
Sachs, didn’t return a call to his office after regular business
hours yesterday seeking comment on behalf of Dahlback.

The cases are U.S. v. Gupta, 11-cr-00907, and SEC v. Gupta,
11-cv-07566, U.S. District Court for the Southern District of
New York (Manhattan).